Revenue and Expense Budget by xqp13895

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									                                     8-1


          CHAPTER 8
     Planning and Budgeting

 The planning process
 The financial plan
 Budget types
   Statistics budget
   Revenue budget
   Expense budget
   Operating budget
   Cash budget
 Static versus flexible budgeting
                                               8-2

          The Planning Process
 The strategic plan is the foundation of the
  planning process. It contains the
  organization’s:
   Mission statement.
   Scope of operations.
   Objectives.
   Broad strategies for meeting stated objectives.
 The operating, or five-year, plan is the “how
  we expect to” portion of the planning
  process.
 The planning process takes place more or
  less continuously throughout the year.
                                                  8-3

     Operating (5-Year) Plan Format

Part 1:   Corporate mission, scope, and objectives
Part 2:   Corporate strategies
Part 3:   Projected business environment
Part 4:   Summary of projected business results
Part 5:   Marketing plan
Part 6:   Operating plan
Part 7:   Financial plan
Part 8:   Administration and human resources plan

Note that the plan is most detailed for the first year.
                                              8-4

           Financial Plan Format
Part 7: Financial plan
  A. Long-term plan
        1. Financial condition analysis
        2. Capital budget
        3. Pro forma financial statements
        4. External financing requirements
  B. Working capital management plan
        1. Overall working capital policy
        2. Cash budget
        3. Cash and marketable securities management
        4. Inventory management
        5. Credit policy and receivables management
        6. Short-term financing
                                           8-5

        Financial Plan Format (Cont.)

    C. Accounting plan (first year only)
        1. Revenue budget
        2. Expense budget
        3. Operating budget
        4. Control procedures


   What are the keys to an effective planning
    process?
                                  8-6

            Budgeting Basics

Budgets are detailed plans, expressed
 in dollar terms, that specify how
 resources will be used over some
 period of time.
Budgets may be developed and applied
 to any level within an organization:
  Aggregate
  By department
  By service line
  By contract
                                      8-7

       Budgeting Basics (Cont.)

To be effective, budgets must not be
 thought of as financial staff tools, but
 rather as managerial tools.
Budgets are used for:
  Planning
  Communication
  Control
 How are budgets used for control?
 What is meant by “communication”?
                                        8-8

            Statistics Budget
The statistics budget is the foundation
 budget, in that it develops the data that is
 needed as input in other budgets.
It contains basic forecasts for:
  Volume of services provided.
  Resources (labor and capital) needed to
   provide those services.
Smaller organizations may not have one.
 How easy is it to create?
 How important is the statistics budget?
                                             8-9

             Revenue Budget

The revenue budget combines volume
 data from the statistics budget with
 reimbursement expectations to forecast
 revenues.
The end result is a revenue forecast:
  In the aggregate.
  By department.
  By service.
  By diagnosis (or other clinical basis).
Timing of revenues is important.
                                    8 - 10

           Expense Budget

The expense budget combines
 volume data from the statistics
 budget with detailed resource
 utilization data to forecast expenses.
To be most useful, expenses must be
 broken down into fixed and variable
 components.
Like revenues, expenses must be
 forecasted a multiple levels.
                                              8 - 11

          Expense Budget (Cont.)

Major components
  Labor
    • Salaries
    • Wages
    • Fringe benefits
  Nonlabor
    •   Depreciation and leases
    •   Medical and administrative supplies
    •   Utilities
    •   Training and education
At larger organizations, each category
 will have a separate budget.
                                    8 - 12

           Budget Decisions

In addition to choosing the types and
 levels of budgets, managers have
 several other decisions to make.
  Timing
  Conventional or zero-based
  Top-down or bottom-up
Note that another type of budget, the
 cash budget, will be discussed later.
                                    8 - 13

                Timing

All organizations use annual budgets
 to set standards for the coming year.
Most also use quarterly (or more
 frequent) budgets to ensure timely
 feedback and control.
Not all budget types have to follow the
 same timing pattern.
Out year budgets are more for
 planning than for control purposes.
                                        8 - 14

    Conventional Versus Zero-Based

Traditionally, health providers have used
 the conventional approach to budgeting.
  The old budget is the starting point.
  Typically, only minor changes are made.
  Changes often are applied equally.
In zero-based budgeting, each new
  budget is started from scratch.
 What are the pros and cons of each
  approach?
                                       8 - 15

    Top-Down Versus Bottom-Up

Bottom-up budgets:
  Begin at sub-unit (departmental) level.
  Are reviewed and compiled by the finance
   department.
  Approved by senior management.
Top-down budgets:
  Begin at the finance department with
   senior management guidance.
  Are sent to the departments for review.
 What are the pros and cons of each?
                                   8 - 16

   Simple Operating Budget Example

Consider the 1998 operating budget of
 Carroll Clinic shown on the following
 three slides. This budget was created
 at the end of 1997.
The budget is divided into four parts:
  Volume assumptions
  Revenue assumptions
  Cost assumptions
  Pro forma P&L statement
                                          8 - 17

      1998 Operating Budget (Part I)

I. Volume Assumptions:

A. FFS                          36,000 visits
B. Capitated lives              30,000 members
     Number of member months   360,000
     Expected utilization PMPM    0.15
       Number of visits         54,000 visits

C. Total expected visits        90,000 visits
                                                8 - 18

         1998 Operating Budget (Part II)

 II. Revenue Assumptions:

A. FFS                 $       25   per visit
                          36,000   visits
                       $ 900,000
B. Capitated lives     $        3   PMPM
                        360,000    member-months

                       $1,080,000

C. Total revenues      $1,980,000
                                            8 - 19

      1998 Operating Budget (Part III)
III. Cost Assumptions:
A. Variable Costs:
     Medical staffing                 $1,200,000
      (48,000 hours at $25/hour)
     Supplies                             150,000
      (100,000 units at $1.50/unit)
        Total variable costs          $1,350,000
     Variable cost per visit          $       15
      ($1,350,000/90,000)
B. Fixed Costs:
    Overhead, plant, and equipment    $   500,000
C. Total expected costs               $1,850,000
                                         8 - 20

  1998 Operating Budget (Part IV)
IV. Pro Forma P&L Statement:
Revenues:
  FFS                      $  900,000
  Capitated                 1,080,000
    Total                  $1,980,000
Costs:
  Variable:
    FFS                    $  540,000
    Capitated                 810,000
       Total               $1,350,000
    Contribution margin    $ 630,000
  Fixed costs                 500,000
Projected profit           $   130,000
                                     8 - 21

            Variance Analysis

A variance is the difference between a
 budgeted value, often called a standard,
 and actual results.
Variance analysis is a technique applied
 to budget data to:
  Identify problem areas.
  Enhance control.
 Why is variance analysis so useful to
 health services managers?
                                         8 - 22

  Static, Actual, and Flexible Budgets

In variance analysis, there are three
 types of budgets used:
  The static budget is the original forecast,
   unadjusted for realized volume.
  The realized, or actual, budget reflects
   after-the-fact results.
  A flexible budget is one that has been
   adjusted to reflect realized volume, but
   using all other static budget assumptions.
 Why might a flexible budget be useful
 in variance analysis?
                                    8 - 23

      Variance Analysis Example

To illustrate variance analysis, we will
 use Carroll Clinic’s forecasted 1998
 budget presented in Slides 17-20 as the
 static budget.
Assume it is now January 1999, and
 the operating results for 1998 have
 been compiled. The results, called the
 actual budget, are shown on the next
 four slides.
                                          8 - 24

             1998 Results (Part I)

I. Volume:

A. FFS                          40,000 visits
B. Capitated lives              30,000 members
     Number of member months   360,000
     Actual utilization PMPM      0.20
       Number of visits         72,000 visits

C. Total actual visits         112,000 visits

   How does this compare with the
    static budget?
                                             8 - 25

             1998 Results (Part II)

 II. Revenues:

A. FFS                     $       25   per visit
                              40,000   actual visits
                           $1,000,000
B. Capitated lives         $        3   PMPM
                            360,000    member-months

                           $1,080,000

C. Total actual revenues   $2,080,000

     How does this compare?
                                             8 - 26

             1998 Results (Part III)
III. Cost:
A. Variable Costs:
     Medical staffing                  $1,557,400
      (59,000 hours at $26/hour)
     Supplies                              234,600
      (124,800 units at $1.88/unit)
        Total variable costs           $1,792,000
     Variable cost per visit           $       16
      ($1,792,000/112,000)
B. Fixed Costs:
    Overhead, plant, and equipment     $   500,000
C. Total actual costs                  $2,292,000
                                       8 - 27

       1998 Results (Part IV)
IV. P&L Statement:
Revenues:
  FFS                     $1,000,000
  Capitated                1,080,000
    Total                 $2,080,000
Costs:
  Variable:
    FFS                   $  640,000
    Capitated              1,152,000
       Total              $1,792,000
    Contribution margin   $ 288,000
  Fixed costs                500,000
Realized profit           ($   212,000)
                                        8 - 28

  Variance Analysis Example (Cont.)

Summaries of Carroll Clinic’s three
 types of operating budgets for 1998 are
 presented on the next slide.
These data will be use to illustrate
 variance analysis.
Note that in most real world analyses,
 multiple flexible budgets would be
 created.
                                                  8 - 29
                    Static        Flexible       Actual
Assumptions:
  FFS visits         36,000         40,000        40,000
  Cap. visits        54,000         72,000        72,000
    Total            90,000        112,000       112,000
Revenues:
  FFS           $ 900,000     $1,000,000     $1,000,000
  Cap.           1,080,000     1,080,000      1,080,000
    Total       $1,980,000    $2,080,000     $2,080,000
Costs:
  Variable:
    FFS         $  540,000    $ 600,000      $ 640,000
    Cap.           810,000     1,080,000      1,152,000
       Total    $1,350,000    $1,680,000     $1,792,000
Total CM        $ 630,000     $ 400,000      $ 288,000
Fixed costs        500,000       500,000        500,000
Profit          $   130,000 ( $    100,000) ($   212,000)
                                                 8 - 30

               Volume Variance

                 Total Variance
                   -$342,000


Volume Variance              Management Variance
   -$230,000                      -$112,000

      Total variance = Actual profit - Static profit.
    Volume variance = Flexible profit - Static profit.
Management variance = Actual profit - Flexible profit.
                                                    8 - 31

       Volume Variance Breakdown

                  Total Variance
                    -$230,000


    Enrollment                  Utilization Variance
     Variance                         -$230,000
        $0
   Volume Variance = Flexible profit - Static profit.
Enrollment variance = Static profit - Static profit.
 Utilization variance = Flexible profit - Static profit.
                                                  8 - 32

    Management Variance Breakdown
              Management Variance
                   -$112,000


      Staffing       Fixed Cost        Supplies
      Variance        Variance         Variance
      -$64,075           $0            -$47,925
Management Variance = Actual profit - Flexible profit.
    Staffing variance = Flexible staffing costs - Actual.
         FC variance = Flexible FC - Actual FC.
   Supplies variance = Flexible supplies cost - Actual.
                                           8 - 33

   Management Variance Breakdown
              (Cont.)
Staffing variance
 Static hours per visit = 48,000 hours /
         90,000 visits) = 0.533.
 Flexible staffing cost = 0.533 x 112,000 x $25
                        = $1,493,325
 Actual staffing costs = $1,557,400
     Staffing variance = -$   64,075
                                            8 - 34

   Management Variance Breakdown
              (Cont.)
Supplies variance
 Supply units per visit = 100,000 units /
        90,000 visits) = 1.111.
 Flexible supplies cost = 1.111 x 112,000 x $1.50
                        = $ 186,675
 Actual supplies costs = $234,600
     Supplies variance = -$ 47,925
                                   8 - 35

  Variance Analysis Example (Cont.)


Variance analysis typically is much
 more detailed than presented in this
 illustration
Now, however, you have the picture
 of what it’s all about.
 Is all this work worth it?
                                    8 - 36

             Cash Budget

Thus far, we have focused on the
 operating budget, which uses accrual
 accounting concepts.
The cash budget focuses exclusively
 on the cash flows that come into and
 go out of an organization.
It can be thought of as a short-term
 version of the statement of cash flows.
                                                        8 - 37

            Sample Cash Budget (Part I)

                         March   April      May        June

Collections Worksheet:
1. Billed charges      $50,000   $50,000   $100,000   $150,000
2. Collections:
     a. Within 30 days                       19,600     29,400
     b. 30-60 days                           35,000     70,000
     c. 60-90 days                            5,000      5,000
3. Total collections                       $ 59,600   $104,400
Supplies Worksheet:
4.   Supplies ordered            $10,000   $ 15,000
5.   Payments for supplies                 $ 10,000   $ 15,000
                                                        8 - 38

           Sample Cash Budget (Part II)

                                            May         June
Net Cash Gain (Loss):
  6.    Total collections (from Line 3) $   59,600    $104,400
  7.    Total purchases (from Line 5)   $   10,000    $ 15,000
  8.    Wages and salaries                  60,000      70,000
  9.    Rent                                 2,500       2,500
10.    Other expenses                        1,000       1,500
11.    Taxes                                            20,000
12.    Payment for capital assets
13.    Total payments                   $   73,500     $109,000
14.    Net cash gain (loss)            ($   13,900)   ($ 4,600)
                                                       8 - 39

            Sample Cash Budget (Part III)

                                             May       June
Borrowing/Surplus Summary:
15.    Cash at beginning with no borrowing $ 15,000  $ 1,100
16.    Cash at end with no borrowing       $ 1,100 ($ 3,500)
17.    Target cash balance                   10,000    10,000
18.    Cumulative surplus cash
            or (loan balance)             ($ 8,900) ($ 13,500)




       Oops! Is this business in trouble?
                                   8 - 40

         Cash Budget (Cont.)

The example shows monthly cash
 budgets for two months. An actual
 cash budget would probably contain
 12 months.
 Should depreciation expense appear
 on the cash budget?
 How can uncertainty be incorporated?
 What is the value of the cash budget?

								
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